1. Microbusiness and risk Lecturer: Tariyel İsmayilov(HM) Е-mail: tariyel.ismailov@accessbank.az Access Bank - 2012

2. 2  What is microbusiness?  Advantage of microbusiness:  The high level of profitability;  Capital flexibility;  Risk aspects of microbusiness:  Small capital is characteristic for these businesses;  Competitiveness;  Specificity of microcredits:  High interest rate;  No strict collateral;  Clients ability to pay and willingness to conform;  and etc.

3. Access Bank - 2012 3 Microbusiness---an economic player allowing hard-working people to generate income in a certain context using their own potential and assuming all risks.

4. These types of businesses are operated in specific area and the focus is directed to these areas only. Client and his family members manage these businesses and therefore demonstrate more interest and persistence. The profitability of a capital is higher and it is due to the fact that this type of business is more labor-intensive rather than the capital-intensive, which means that the labor is not included into the capital and thus the capital profitability is higher. In this context, resources accumulated in such businesses are more profitable as compared to the large businesses. The capital is more mobile, which means that due to the small capital such businesses could change its activity direction quickly reacting to the changes in domestic market. Such businesses are specialized on production of the final product which has a high demand in the local consumer market..(perishable goods, jewels and etc) therefore the demand in these areas are exposed to serious changes. Access Bank - 2012 4

5. Smallness of the capital and occurrence of any problem and even an expenditure of small capital lead to bankruptcy of these types of businesses... Due to the limit of revenues any additional expenditures could result in serious losses, in this case businesses having minimum costs, as opposed to the large businesses, have no opportunity to reduce any expenses. There is no potential for further expansion of business, because the revenue mainly meets the consumer objectives. The low level of competitiveness, i.e. establishment of the large businesses, in the context of economy of scale, force this type of business out from the market or force them to move to another activity area. Access Bank - 2012 5

6. 1. The high interest rate: →The lack of hard collateral increases the risk margin; →Microcredits delivery requires high quality financial analysis, similar documentation and thus operational costs for loan officers are in line with the large lending as an absolute indicator, however relatively takes a significant place as a interest indicator; →Due to the fact that the clients require an operative and also conservative, not exaggerated but optimal credit there is a need for operative financial analysis, therefore banks and non-banking financial institutions shall attract high motivated and high level professionals which, in turn, means additional high costs. Microcredits are effective only if they are in optimal amount! Microcredits are effective only if they are in optimal amount! Access Bank - 2012 6

7. 2. Repayment of credits: Through the following preventive measures it is possible to maintain the high quality of credit portfolio:  Proper analysis of the clients financial status and their personal nature,  Offer credits according to the clients potential,  Measures to strengthen the awareness of clients in this area,  Focus to overindebtedness of the clients.  Focus to the purpose of credit (if the credit are taken for client – not given to third party, if it is given to third party, the above-mentioned losses its significance) --- Financial analysis should focus on 2 main points: Access Bank - 2012 7 Ability to pay Willingness to pay

8.  What is the ability to pay? --- Ability to pay means the possibility to pay at the cost of income to be generated by client.  Each banking credit conforms with the client’s ability to pay, when additional credits are offered by other banks, even the ability to pay is not changed and the credit payments are changed, all payments are exposed to risk.  In another case, one credit is used for the payment of other credit and this leads to the financial pyramid!  In fact, this type of business, as compared to the large businesses, does not need the use of services of several banks and non-banking financial institutions! Access Bank - 2012 8

9. Client’ willingness to pay credit:  Personal characteristics... However, according to the average statistic indicators we could note that people with normal personal characteristics can also have some problems and due to the lack of stimulating factors problems can occur.  The client should realize that in case of any problem occurred he will not be able to borrow neither from this bank nor from any others… This in turn, is the factor influencing to the quality of portfolio.  At least, according to the credit history the further credit delivery will make clients more attractive...  When the client can benefit from the credit, he become more optimistic for the further cooperation with bank and become more disciplined. Access Bank - 2012 9